Six things to remember when making SMSF succession plans

Laws in the SMSF area are “strict and complex”, so it’s important that trustees are aware of the consequences of the decisions they make.

That’s according to AMP Capital, which in a recent note advised SMSF trustees and members to take the time to understand the way their succession plans operate.

AMP financial planning adviser Damian Hearn outlined six things to be aware of when making and updating SMSF succession plans.

1. “First and foremost is to understand what the trust deed allows when it comes to estate planning.”

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Mr Hearn warned that “just because something isn’t specifically prevented in the deed doesn’t mean you can do it”.

As it is with all superannuation funds, trustees should understand that the super doesn’t form part of the estate. Members and trustees should consult their deed as they’re completing their estate plans, Mr Hearn added.

“Having a game plan when it comes to your superannuation and how it fits in your overall estate plan is extremely important.”

Further, estate planning might mean the fund’s trust deed needs to be updated by adding specific clauses or instating a living will within the SMSF. This will needs to give “comprehensive instructions” as to what should occur in the succession plan.

“It can be as simple as indicating all your superannuation should go to your spouse. Or it can be more complicated, and the deed might include a number of instructions as to what should happen after a member’s death which are consistent with the superannuation law,” Mr Hearn added.

2. “If you put your superannuation into the estate, you need to have very clear goals as to how the money will be distributed via your will.”

AMP Capital argued that there are “considerable potential tax consequences” for beneficiaries receiving SMSF funds, depending on the beneficiaries’ relation to the member or trustee.

For example, financially independent, adult children will see funds granted to them from their parents’ SMSFs taxed at 15 per cent, plus the Medicare levy.

However: “Clients can make a personal after-tax contribution to super and, depending how the planning is done, it can be earmarked for an adult who is non-financially dependent on the member,” Mr Hearn said.

“Pre-planning and seeking advice is essential, but the result is that when the money is passed onto the adult child, you're passing on personal after-tax contributions that are paid out tax free.”

One option suggested by AMP Capital is for trustees to make a “binding nomination” to the estate that directs the super to it and then within the will make a stipulation that super proceeds received are to be granted to the elected beneficiary.

However, it’s important to remember that the binding nominations need to be reviewed every three years and comply with super rules.

“If the binding nomination does not comply with the rules, for instance the nomination was not properly witnessed, the court could rule that, rather than being valid, trustee discretion will apply,” Mr Hearn said.

3. “Relatives like a brother or sister who are not financially dependent on the member are not considered to be superannuation dependents.”

It’s important to understand who can be considered a dependent, like a spouse or child, and who is not, like a brother or sister.

“So have a good understanding as to who a super dependent is, because if you put together a binding nomination and nominate somebody who is not a super dependent, the nomination will fail,” Mr Hearn said.

“When you start your pension you can decide to continue the pension on the member’s death to their spouse via a reversionary beneficiary. That's a significant planning point.”

Warning that if nominations are not made correctly, funds can be directed to the wrong person, AMP Capital added that it’s “also essential” to have an enduring power of attorney as protection for if one or more members can no longer make legal decisions.

4. “Failure to review binding nominations which lapse after three years is also a problem for many funds.”

“Even if you have a non-lapsing binding nomination it’s important it’s reviewed because members’ circumstances may change,” Mr Hearn continued.

For example, children age and as such, they may no longer be financial dependent.

Mr Hearn explained: “Those changing circumstances can warrant a change to the non-lapsing binding nomination because the children are not tax dependents. If the member died the children might be liable to pay tax that they otherwise would not have to pay if the funds were directed to another beneficiary such as his spouse.”

AMP Capital warned that legal challenges in some states can overturn binding nominations. For instance, in NSW, the Family Provisions Act allows beneficiaries with grievances to seek legal resolutions.

“The aggrieved party would have to comply with the law and prove they are disadvantaged by not receiving an inheritance and a proper provision was not forthcoming based on their circumstances. But the NSW Supreme Court can overrule a binding nomination,” Mr Hearn warned.

Additionally, it’s crucial that trustees consider the implications of the assets held within the fund. Assets like property, art or investments like coins can take time to sell and can complicate matters.

6. “Winding up the fund can make estate planning and the final phase of life simpler.”

Is it really worth maintaining an SMSF when you reach your late 70s or early 80s? Mr Hearn argued that it may not always be the case.

“At this point another question is whether children should become members of the fund. They would receive all the advantages of a self-managed super fund by becoming members, and it can be useful to have younger members in the fund when one member dies,” he concluded.